New Income Drawdown Rules from April 2011

Transcription

1 New Income Drawdown Rules from April 2011 Many clients are wondering about the new rules from pensions that apply from 6th April You will have heard in the press about the scrapping of compulsory annuitisation at age 75. To be honest it never really existing anyway and the new rules are just a slightly different version of what was already there. However there are some important tweaks. In particular: Pensions and lump sums will no longer have to be taken by age 75; New income drawdown rules will replace the existing unsecured pension (USP) and alternatively secured pension (ASP) rules, which are being abolished; A new type of income drawdown, known as flexible drawdown, will be available for those who meet the new minimum income requirement (MIR); Existing USP and ASP cases will be gradually moved fully onto the new basis under transitional rules; The death benefit rules, and aspects of their tax treatment, will change (benefiting those currently in ASP) Do pensions and lump sums still have to be taken by age 75 after April 2011? After 5 April 2011, benefits don t have to be taken from a registered pension scheme by age 75 they can just be left in the scheme as unused funds until the member needs them. Where scheme rules allow, this gives members the flexibility to delay taking their pension or tax-free lump sum until after age 75 potentially even continuing a phased retirement strategy into their 80s or even beyond this. The benefits will, however, still have to be tested against the lifetime allowance by age 75 (as a benefit crystallisation event). This means that lump sum death benefits paid after age 75, even from unused funds, will be subject to the 55% tax charge unless it is a charity lump sum death benefit (which can be paid tax-free). From 6 April 2011, the following lump sums can also be paid after 75: Trivial commutation lump sums; Trivial commutation lump sum death benefits; Winding up lump sums; Serious ill health lump sums (but only from unused arrangements and subject to a 55% tax charge). What are the new pension income drawdown rules from April 2011? From 6 April 2011, the existing unsecured pension (USP) and alternatively secured pension (ASP) rules will be replaced by a new single set of income drawdown rules

2 that are similar to the current USP rules. The key features of the new rules are as follows: Income limits The highest income allowed in a pension year will be 100% of the basis amount from the GAD tables at all ages (down from the current 120% under USP, but up from the 90% ASP limit). The lowest yearly income allowed will be nil (the same as the current USP rules, but significantly more flexible than the 55% minimum that had to be taken under the current ASP rules). Those who meet the new minimum income requirement (MIR) will also have the option of flexible drawdown, which allows unlimited income to be taken at any time. The GAD tables will be updated to reflect recent mortality improvements and extended to cover ages after 75. Income reviews Until age 75, the income limit must be reviewed at least every three years (compared to the current five-yearly reviews under USP). Once over 75, the limit must be reviewed every year. Death benefits Lump sum death benefits will be allowed from income drawdown funds at any age (a welcome relaxation for the over 75s). For deaths after 5 April 2011, any lump sum death benefit paid from an income drawdown fund (or after age 75 from unused funds) will be taxed at 55% (up from the 35% that currently applies under USP). Lump sums paid on or after 6 April 2011 as a result of a death in USP before then will still be taxed at 35%. Timing The new rules will apply immediately to any arrangement moved into income drawdown for the first time after 5 April People already in USP or ASP before 6 April 2011 will be moved fully onto the new rules over a period of up to 5 years under transitional rules. What is pension flexible drawdown? Flexible drawdown is perhaps the most radical aspect of the new income drawdown rules from 6 April Under flexible drawdown there is no limit on the amount of income that can be drawn each year the individual can take their entire income drawdown fund out in one go if they really want to! The usual tax-free lump sum is allowed, but any other withdrawals taken by the individual will be taxed as income in the tax year they are paid. If an individual

3 becomes non-uk resident whilst in flexible drawdown, any income drawn when nonresident will be subject to UK tax if they return to the UK within five tax years of taking it. To opt for flexible drawdown, an individual must: meet the minimum income requirement (which is a safety net, so they won t fall back onto State benefits); and stop all pension provision (so there is no second bite of the tax-relief cherry). Protected rights Protected rights funds can use the normal income drawdown basis but cannot go into flexible drawdown. The minimum income requirement To meet the minimum income requirement (MIR), an individual must have a secure pension income of at least 20,000 (either in their own right or as a dependant) in payment in the tax year they opt for flexible drawdown. This income can come from a combination of: State pensions; Lifetime annuities (including with-profits or unit-linked annuities) under registered pension schemes; Scheme pensions from registered pension schemes; and secure pensions from overseas pension schemes. Income drawdown pensions, and pension income from other sources (such as nonregistered pension schemes or purchased life annuities), do not count towards the MIR. The Treasury will review the level of the MIR at least every five years, but an individual only needs to pass the test when they opt for flexible drawdown. They won t be tested again if the MIR goes up. Pension provision must stop Also, when someone opts for flexible drawdown they must have stopped all pension provision. In particular: there must have been no contributions (personal, employer or third party) paid to a money purchase scheme for them during the tax year; and they must not be an active member of any defined benefit (or cash balance) schemes. If pension provision restarts for them in future (whether funded by them, their employer or a third party), they ll be fully subject to the annual allowance tax charge on it. When will the 2011 income drawdown rules apply to existing unsecured or alternatively secured pensions?

4 People already in unsecured pension (USP) or alternatively secured pension (ASP) before 6 April 2011 will be moved fully onto the new income drawdown rules over a period of up to 5 years. Unsecured pension (USP) income limits Those in USP on 5 April 2011 will keep the 120% income limit until the earliest of: Next reference period: The start of their first new reference period (that is, when their five year review falls due or at any earlier interim annual review); or Drawdown transfer: The start of their next pension year after transferring their drawdown fund; or Age 75: The start of their next pension year after age 75. New phasing, part annuitisation or pension sharing after 5 April 2011 will still trigger an income review, but this will be done on the old 120% basis. It won t change the five year reference date or trigger a move to the new 100% income limit. So someone who goes into USP before 6 April 2011, or resets their five year reference period by requesting an interim review on the anniversary of their drawdown year before 6 April 2011, may not move onto the lower 100% income limit and more frequent reviews until well after Alternatively secured pension (ASP) income limits Those in ASP on 5 April 2011 will have their first income review using the new rules at the start of their next pension year. Until then, the basis amount calculated at their last income review will remain in force. However they can switch off their income, or increase it to 100% of their existing basis amount, immediately from 6 April Death benefits The new income drawdown death benefit rules (that is, lump sums after 75 and the 55% tax charge) apply to deaths after 5 April Any deaths before 6 April 2011 are subject to the old USP or ASP death benefit rules, even if the benefits aren t actually paid out until after that date. How will the pension death benefit rules change from April 2011? From 6 April 2011, there are some significant changes to the pension death benefit rules: Lump sum death benefits will be allowed at any age. For deaths after 5 April 2011, the tax charge on lump sum death benefits paid from crystallised rights will be 55% (up from the current 35%). Tax-free charity lump sum death benefits will be allowed in more circumstances. The scope for an IHT charge against pension rights will be narrowed.

5 Death benefits paid from 6 April 2011 relating to a death before then will still be covered by the old rules. Death before age 75 On death after 5 April 2011 aged less than 75, any lump sum death benefit will: Still be tax-free if paid from uncrystallised rights; But normally taxed at 55% if paid from crystallised rights (such as income drawdown funds or a value protected annuity). The only exception is for charity lump sum death benefits, which can be paid tax-free from crystallised rights. Death on or after age 75 On death after 5 April 2011 aged 75 or over, it will be okay to pay lump sum death benefits. This is a sea-change from the current position on death in alternatively secured pension (ASP), where only a charity can legitimately benefit from a lump sum on death. Any lump sum death benefit paid after 75 (including those from unused funds) will be taxed at 55%. Charity lump sum death benefits At present, a charity lump sum death benefit can be paid tax-free to a nominated charity on death in ASP where there are no surviving dependants. For deaths after 5 April 2011, this option will be extended to cover death in drawdown before age 75. To qualify as a tax-free charity lump sum death benefit, all the following criteria must be met: The lump sum is paid from income drawdown funds; and There are no surviving dependants of the member to pay a pension to; and The deceased member (or dependant) had nominated a recipient charity (it will no longer be possible for the scheme administrator to make a nomination). Lump sum death benefits can be paid to charities in other circumstances, but if they come from crystallised rights the usual 55% tax charge will apply. IHT (Inheritance Tax) At present, pension rights can create IHT liabilities albeit only in fairly limited circumstances. From 6 April 2011, there are two significant changes that will make the risk of IHT charges even smaller: The abolition of the ASP rules mean that the IHT charges that currently apply on death in ASP won t apply for deaths after 5 April The ability for HMRC to levy IHT where they consider that someone has deprived their estate through an omission to act (for example, by delaying taking their pension) will be removed for omissions after 5 April 2011.

6 I trust this update provides clients with an informative update on how the changes in law will effect those both in drawdown or those approaching retirement and considering their retirement options.